In mid July we discussed Crude Oil breaking out of a Symmetrical Triangle Pattern and its price having a high probability of heading higher in the future. Since that market analysis in July when Crude Oil was $108.05 it has rallied to $112.24. During this move higher many traders chased this break out pattern paying top dollar for Crude Oil all the way up to $112.24. Well what goes up must come down, and this rule applies to Crude Oil as well which has fell in price to currently the mid $101 area. So Is Crude Oil finished selling off? Let’s take a look at the below charts and see what they’re telling us.
On the bottom is the chart included in the market analysis provided in July titled “How to Use Chart Patterns-Higher Gas Prices”, which shows Crude Oil breaking out of its Symmetrical Triangle Pattern. The top chart shows daily price candles of Crude Oil and how Crude has consolidated sideways after breaking out of that same Symmetrical Triangle Pattern, plotted with a purple trend line. Recently we sold off below the Aug 8th low of $102.22 and are now in a Bear Trap Area, plotted with an orange horizontal line on the chart.
We often mention these trap areas because they are a high probability area for price reversals to occur due to a potential exhaustion of the current direction. Some poor “late to the party” buyers paid top dollar at $112+ for Crude Oil, and have been feeling the pain as it has sold off. These buyers will eventually panic sell out of their trade somewhere and a high probability area is the Aug 8th lows do to the “late to the party” buyers placing their stop loss orders below a recent low. The lowest recent low is on August 8th so there is high probability chance that these stop losses will be triggered creating a large supply of market sell orders. This large supply of sell orders finally could put the buyers in a position where they outnumber the sellers who are now in control.
Of course just because we know there will be a large number of stop loss orders in this area does not mean there is a 100% chance that the selling pressure will ease, so appropriate risk management is necessary as always. Also, waiting for price to confirm this potential reversal with a Bullish Candlestick Pattern can also be utilized to increase the probability of a profitable buying opportunity. So the answer to our question of is Crude Oil finished selling off is; we don’t know 100% but finally have a high probability area to allow an entry to buy Crude for a move to new highs. By being patient since July we prevented being one of the “late to the party” buyers who bought the highs, always nice to not be the sucker!